Breach list

India caps how much of a listed company foreigners may own. The cap can be a company-specific limit for Foreign Portfolio Investors (FPIs), a separate limit for NRIs, or the overall sectoral limit that applies to the industry the company is in. Exchanges track this for every listed company.

When a company's foreign holding touches its ceiling, fresh purchase orders from the restricted class of investor are blocked in that stock. The portfolio manager running an NRI's account has to check this list before every buy order, because the block sits with the company, not with the client's own account.

The workbook states the rule as a special consideration for NRI trading accounts opened through a portfolio manager: "NRIs cannot trade in securities which are in the breach list (List of companies where foreign investment has reached its permissible limit as applicable for Foreign Portfolio Investor (FPI)/NRI/Overall Sectoral Limit)."

Three further conditions apply alongside it, in the same list of special considerations, and all of them apply together:

• clear funds must be available before a purchase order is placed;
• securities must be available in the demat account before a sell order is placed; and
• purchase and sale transactions in the cash segment are settled by delivery only.

The workbook does not give the numeric percentage that triggers the breach list — that threshold sits in RBI and SEBI foreign-investment rules, not in this chapter — so answer on the mechanism, not a memorised percentage. What the chapter does fix in rupees is the size of account this restriction typically bites on: an NRI, like any other client type, needs a minimum investment of Rs 50 lakh to open a PMS account at all.

Mr Ramesh Iyer, an NRI based in Dubai, opens a discretionary PMS account with Meridian Portfolio Managers Ltd with the minimum Rs 50 lakh corpus, routed through his NRE Portfolio Investment Scheme (PIS) account.

His portfolio manager wants to buy Rs 4 lakh of shares in Konkan Defence Ltd on his behalf. Before placing the order, the dealer checks the exchange's published breach list and finds Konkan Defence on it — the overall sectoral limit for defence manufacturing has been reached by combined FPI and NRI holding in the stock. The order cannot be placed, however much clear balance sits in Mr Iyer's account.

The manager buys an alternative stock in the same sector instead. A week later an existing NRI shareholder sells down her position in Konkan Defence, foreign headroom reopens, the stock comes off the breach list, and Mr Iyer's manager is free to buy it for him from that point on.

Chapter 8 (Operational Aspects of Portfolio Managers) lists the breach list among the special considerations for NRI trading accounts, alongside the clear-funds and delivery-only settlement rules. Expect a recall question — which of the following can an NRI not do — and a scenario question testing whether the restriction sits with the company or with the client's cash position.

• The breach list restricts the security, not the investor's funds. An NRI with ample clear balance still cannot buy a stock that is on the list.
• It is not a margin or exposure limit set by the portfolio manager. It is an issuer-level foreign-ownership ceiling that applies to every NRI and FPI buyer alike.
• Clear funds, securities availability and delivery-only settlement are separate NRI conditions that apply whether or not a stock is on the breach list — do not fold the rules into one.
• The workbook gives no trigger percentage; do not answer with a number the chapter does not state.